It's Here

A faltering dollar, along with terrorism and trade concerns, weighed on global
equity markets this week. Here at home, stocks faced only moderate selling
pressure. For the week, the Dow and S&P500 declined better than 1%. The
Transports dropped 3% and the Morgan Stanley Cyclical index declined 2%. The
Utilities and Morgan Stanley Consumer indices lost about 1%. The small cap
Russell 2000 declined 1%, with the S&P400 Midcap index declining less than
2%. The technology sector was under general selling pressure. The NASDAQ100
declined 2%, the Morgan Stanley High Tech index 3%, and the Semiconductors
1%. The Street.com Internet index dipped 3%, and the NASDAQ Telecom index declined
2%. The Biotechs dipped 1%. The financial stocks were mixed, with the Broker/Dealers
hit for 3%, while the Banks declined less than 1%. With bullion up $1.50, the
HUI Gold index posted a 4% advance.

November 18 - Bloomberg: "Hutchison Whampoa Ltd., the holding company controlled
by Hong Kong billionaire Li Ka-Shing, led borrowers in the U.S. with a sale
of $5 billion of notes, the biggest global bond sale ever for an Asian company.
The ports and telecommunications company boosted the amount after investors
sought four times its initial offer of $3 billion... Hutchinson was joined
by other foreign sellers today, including the Canadian province of Ontario
and Australia and New Zealand Banking Group Ltd."

Brazil's central bank cut the overnight target rate 150 basis points to 17.5%,
a two-year low. The benchmark Brazilian "C bond" yield dropped 39 basis points
this week to a new low of 9.01%. It is worth noting that this yield is down
almost 350 basis points since the July/August spike. The Brazil Bovespa index
closed today at a record high, with 2003 gains of 71%.

Commodities Watch:

The CRB index took it on the chin this week, dropping almost 3%. High-flying
copper declined 6% and Cotton sank 7%. Yet, and I would argue importantly,
gold and crude oil held their own. Additionally, the commodity currencies continue
to shine. The South African rand surged better than 3% this week, increasing
y-t-d gains to 31%. The Australian (up 29% y-t-d) and New Zealand (up 22% y-t-d)
dollars traded to their highest respective levels since October 1997. The Canadian
dollar was about unchanged this week at a near 10-year high.

November 20 - Associated Press: "For the first time in six years, Chinese
grain harvests are falling short of demand and reviving the question: Will
China be forced to rely on imports to feed itself? Since late summer, wheat
prices in the northeast have shot up by 32 percent; corn prices have doubled
and rice prices are up by as much as 13 percent, according to official reports.
Prices of edible oil, vegetables, meat and other food products have also jumped.
Grain harvests this year are estimated to have fallen for the fifth year in
a row -- hit by a double whammy of bad weather and cutbacks in acreage. 'They've
got a problem with their stocks and the crunch is hitting now, partly because
of the weather,' says Rich Herzfelder, executive vice president of the China
Food and Agricultural Services, a Shanghai-based consultancy."

November 18 - Bloomberg: "Goldman Sachs Group Inc... raised price forecasts
for metals such as aluminum and copper and iron ore because of economic growth
in China. 'The risks to our new higher metal price forecasts are skewed to
the upside... In contrast to the consensus view we would argue that Chinese
metal demand is not a transient phenomenon.'"

November 17 - Bloomberg: "A record U.S. corn harvest and rising demand in
Europe and Asia for wheat and soybeans have created a shortage of railcars
to transport the crops. The scarcity is slowing overseas sales for suppliers
such as Cargill Inc. and raising costs for railroads like Union Pacific Corp.
The monthly lease rate for a 120-ton 'grain hopper' railcar, capable of carrying
5,150 cubic feet of grain, is about $200 to $250, up from $120 to $150 a year
ago..."

Global Reflation Watch:

November 18 - Bloomberg: "Indonesia said it may almost double a planned
sale of global bonds to $1 billion after investors showed interest in
the nation's first overseas debt offering since 1996. 'The response was very
positive,' Bank Indonesia Governor Burhanuddin Abdullah said... Indonesia's
7.75 percent bond maturing in August 2006 yields about 2.7 percentage points
more than similar-maturity U.S. Treasuries...(having) narrowed from about
3.5 percentage points at the start of October."

November 17 - Bloomberg: "China's economy may expand 8.7 percent this year
and 9.5 percent next year, Goldman Sachs Group Inc. said in a report,
which also raised growth estimates for Hong Kong, South Korea, Taiwan and Singapore.
China's gross domestic product was previously forecast to gain 8.1 percent
in 2003 and 8.4 percent next year, the U.S. brokerage said in its research
report published today... 'China is still at an early stage of a new expansion
cycle,' the brokerage said. 'An acceleration in China's domestic demand
will translate into stronger exports, which will in turn feed into a stronger
pickup in fixed investment."

November 17 - Bloomberg: "China's retail sales grew in October at their
fastest pace in two years as rising incomes and a credit boom enable
consumers to buy more cars, homes and cell phones. Sales in the world's sixth-largest
economy increased 10.2 percent from a year earlier... Goldman Sachs Group
Inc. raised its 2004 growth forecasts for Singapore and Taiwan to 5.8 percent
from 4.5 percent and 5 percent respectively, today's research note showed.
It also lifted its estimate for South Korea to 6 percent from 5 percent.
All three economies count China, including Hong Kong, as their No. 1 overseas
market. 'China's importance as an export market for the rest of Asia has
taken a quantum leap since 2002,' Goldman said today in a research note.
'Asian exports have been revving up of late, again spurred by China.'"

November 20 - Bloomberg: "U.K. retail sales last month rose twice as fast
as expected and mortgage lending soared to a record, increasing the risk of
a sharp slowdown in consumer spending later on, economists said..."

November 19 - Bloomberg: "Russia's economy will probably grow at the fastest
pace since 2000 this year, the Economy Ministry said, as oil prices average
$5 a barrel more than the highest government forecast and consumer spending
soars. Gross domestic product will rise 6.6 percent this year, Deputy Economy
Minister Arkady Dvorkovich told lawmakers in Moscow..."

November 19 - Bloomberg: "Malaysia's economy accelerated in the third quarter
as computer chipmakers including Unisem (M) Bhd. and oil-palm producers such
as United Plantations Bhd. raised production to meet increased demand from
overseas. Gross domestic product expanded 5.1 percent in July to September
from a year earlier, the central bank said, faster than the median forecast
of 4.7 percent..." "Malaysia's broadest measure of money in circulation rose
in October at its fastest pace in more than five years, as exporters brought
home money earned overseas and investment increased, the central bank said."

Domestic Credit Inflation Watch:

November 21 - Bloomberg: "Federal Reserve officials sent a message to financial
markets this week: There is no need to raise interest rates to curb
a U.S. economic recovery. In eight speeches so far this week, and
with another three to come today, the signal from policy makers is that the
Fed will allow economic growth to strengthen without raising interest rates
because there's no danger of inflation. 'It's very easy to conclude that
the Fed is accommodative, and fairly significantly accommodative,' Robert
Parry, president of the Federal Reserve Bank of San Francisco, told Australian
business economists... 'We are comfortable with that position because
of all of the slack we have in the labor and product markets,' Parry said.

November 19 - Dow Jones: "Assets under management in the hedge fund industry
have rocketed to over $745 billion, according to a survey published by
trade magazine Alternative Services Review Wednesday. The figure is significantly
higher than the $600 billion estimate generally given by industry commentators.
ASFR's figure only relates to funds that use a third-party administrator,
so the total amount of existing hedge fund assets is probably higher,
ASFR editor Angus Rodger told Dow Jones Newswires."

November 19 - Bloomberg: "The St. Louis Cardinals will begin construction
on a new downtown ballpark by Dec. 31 after a state board Tuesday approved
$45 million of tax-exempt bonds and $29 million of tax credits to help fund
the stadium, the St. Louis Post-Dispatch reported. The Cardinals plan to close
on private financing of the $402 million project Dec. 18 and begin construction
by year-end..."

Nov. 19 (Bloomberg) -- Robert E. Rubin, a former U.S. Treasury secretary and
executive at Citigroup Inc., comments on Fannie Mae and Freddie Mac... 'I think
Fannie Mae and Freddie Mac serve a very useful purpose in terms of improving
mortgage finance in this country, Rubin said. 'The problem is that they do
have a number of real benefits including the implicit, not explicit, but implicit
guarantee of the U.S. government. As long as they stay within their charter
it seems to me they serve a very useful purpose.' 'There are two sets of issues.
It is subsidized capital to some extent, and once they get outside of the area
in which they were chartered to operate, the question is do you want to create
that distortion in capital. I think that distortion is well-advised for
the purpose they serve. Once you get outside of that you have to decide what
purpose is that serving. 'On the question of whether it is a real risk to
our system, I don't profess expertise, but it seems to me that is an issue
that is manageable.'"

Foreign "custody" Holdings of U.S. and Agency debt increased $11.9 billion
last week. Custody holdings have surged $92 billion, or 29% annualized, since
the end of July (16 weeks). Year-to-date, custody holdings are up $163.5 billion,
or almost 22% annualized, to $1.01 Trillion. Custody holdings are up 37% over
the past 18 months (May 8, 2002).

Freddie Mac posted 30-year fixed mortgage rates dropped 20 basis points this
past week to 5.83% (lowest in seven weeks). Fifteen-year fixed mortgage rates
sank 22 basis points to 5.17%. One-year adjustable rate mortgages could be
had at 3.72%, down 4 basis points. The Mortgage Bankers Association Purchase
index jumped 13.5% the past week to the highest level in five weeks. Purchase
applications were up 11.5% y-o-y, with dollar volume up 20.0%. The ratio of
adjustable-rate to total mortgages has jumped to 27.5%, the highest since early
2000.

October Housing Starts and Building permits data were nothing short of spectacular.
Housing Starts rose to the highest level since January 1986. Year-over-year,
Starts were up a blistering 17.6% to 1.96 million annualized, with Single-family
Starts up 17.4% and Multi-family up 18.2%. Building Permits were issued at
an annualized rate of 1.973 million units, the strongest rate since 1984. Permits
were 9.7% above October 2002, with Single-family up 9.9% and Multi-family up
9.0%. And to put some perspective into October's almost 2 million annualized
Housing Starts, it is worth noting that Starts sank to a low of 800,000 back
in 1991 and did not surpass 1.6 million units until the second half of 1998.

November 19 - Los Angeles Times (Karen Robinson-Jacobs): "Defying the usual
fall slowdown, home sales last month in Los Angeles and Orange counties hit
the highest level for any October since 1988... Sales of new and previously
owned single-family houses and condominiums in Los Angeles County rose 13%
from October 2002. Sales increased by 9% in Orange County, according to...DataQuick.
And November, usually one of the slowest sales months of the year, also
appears to be shaping up to be a record buster. 'Our [third quarter]
was up 48%, in terms of sales volume' compared with 2002, said Peter Hernandez,
president of Coldwell Banker Orange County. 'And November looks stronger
than October.' November and February typically are the slowest months as
would-be buyers prepare for and then recuperate from the holidays, said John
Karevoll, (of) DataQuick. 'That said, I fully expect this November to be
the strongest we have had since 1988.' Home sale prices in October also kept
growing at a sizzling pace: The median price in Los Angeles County climbed
22% from a year ago to about $332,000 last month... In Orange County, median
home prices hit a new record of about $440,000, a 19% increase from a year
ago... Based on figures expected to be released today, the median price in
Riverside County last month increased by 19% from a year ago to about $262,000.
In San Bernardino County, where wildfires disrupted some sales in late October,
the median price last month jumped 24% from October 2002 to about $204,000...
In Ventura County, home buyers saw a 21% price hike in October from a year
earlier to $401,000."

November 20 - PRNewswire: "The luxury home market in California is heating
up, with Los Angeles values rising to their highest levels in 12 years and
San Diego homes reaching another record high, according to the Prestige Home
Index(TM) by First Republic Bank... 'The market is as hot as a pistol right
now,' said agent Myra Nourmand of Nourmand & Associates in Beverly
Hills. 'It's just absolutely insane.' She noted that a property which
sold for $12.5 million 2-1/2 years ago is on the market today for $29 million.
'There's not a lot of product and there are a lot of buyers.'"

Dollar Watch:

It's here. Or "until proven otherwise," I will assume that Tuesday's significant
dollar decline marked the commencement of a more problematic stage for the
unfolding dollar "problem." Dollar sentiment was surely not helped by the Treasury's
release of September's "Transactions with Foreigners in Long-term Securities." Monthly
Net Purchases, having averaged almost $76 billion over the preceding six months,
collapsed to a measly $4 billion. I will not place too much emphasis on one
month's data, but this release highlights the risk of broad-based waning demand
for U.S. securities. Averaging $16 billion monthly through August, net purchases
of Agency debt reversed to a negative (liquidation) $3.2 billion. Foreigners
also liquidated $6.3 billion of stocks, while purchasing net $5.6 billion of
Treasuries and almost $20 billion of corporate bonds (including ABS). Year-to-date,
Treasury and Agency purchases have accounted for 63% of total purchases, this
compared to 51% during 2002 and 36% for 2001. U.S. "risk assets" are out of
favor.

The financial centers of Japan, the UK (London) and the Caribbean traditionally
account for a large percentage of "foreign" purchases. What role the global
leveraged speculating community plays in these transactions (as opposed to
true investors) we will likely never know. But it is interesting to note that
purchases from the UK were normal during September (around $12 billion), while
the Caribbean turned from a buyer ($15 billion monthly avg. over the preceding
5 months) to a net seller of almost $11 billion. The Caribbean saw agency liquidations
of $8.7 billion. It is fascinating that the Caribbean accounted for 66%
of total agency transactions during September, although down from the almost
75% from May through August. Japan made net Treasury purchases of $21.5
billion during September, with a y-t-d monthly average of $9.2 billion. This
compares to last year's average of $2.1 billion. Year-to-date, Japan's purchases
of U.S. long-term securities have jumped to $10.3 billion monthly compared
to 2001's $6.0 billion. Yet Agency net monthly purchases have declined about
20% to $1.9 billion. Total Japan, UK, and Caribbean net purchases have averaged
$30 billion monthly this year, compared to about $22 billion last year. The
monthly average of net Treasury purchases has more than doubled to $13.5 billion.

Certainly, comments from our top central bankers do anything but inspire dollar
confidence.

November 19 - Fed Bank of St. Louis President William Poole: "The general
public is also concerned about the large and increasing U.S. trade deficit.
Some of the concern reflects a view that U.S. exports should equal U.S. imports.
This view fails to appreciate that a country's trade balance and its capital
account are very closely related... Via basic accounting, a country's capital
account surplus is equal to its current account deficit. For simplicity, let's
view the current account deficit as the trade deficit. A common mistake
is to treat international capital flows as though they are passively responding
to what is happening in the trade account.In fact, investors abroad
buy U.S. assets not for the purpose of financing the U.S. trade deficit but
because they believe these assets are sound investments, promising a good combination
of safety and return. On a personal level, every one here has the option
of moving funds abroad, for example through mutual funds that invest in foreign
stocks and bonds. Why is the net capital flow into rather than out of the
United States? The reason is that for most investors the United States
is the

capital market of choice. There is no better place in the world to invest.
In sum, the United States has created for itself a comparative advantage
in capital markets, and we should not be surprised that investors all over
the world come to buy the product. As investors exploit the opportunities
provided by U.S. financial markets, trade deficits can arise. Thus, my
view is that our current trade deficits are not a cause for alarm because
on the whole they reflect extremely positive forces driving the U.S. capital
account."

Global central bankers, especially the Europeans, must be aghast. And (ironically),
this today from a speech delivered by Dr. Poole at the Cato institute's commemoration
of the 40th anniversary of the publication of Milton Friedman and
Anna Schwartz's "A Monetary History of the United States: "Perhaps the most
important message I take away from the Monetary History is the tremendous importance
of ideas in shaping monetary policy. Bad economic analysis will almost certainly
produce bad monetary policy. The real-bills doctrine had a lot to do with
the Federal Reserve's catastrophic mistakes in the early 1930s. Later...the
theory of a Phillips curve tradeoff between inflation and unemployment played
a similar role in fostering the Fed's inflationary mistakes of the 1960s and
1970s."

Well, I would argue that the bad economic analysis is only perpetuating some
of the worst monetary policy imaginable.

The following are excerpts from yesterday's "Remarks by Chairman Alan Greenspan
at the 21st Annual Monetary Conference, Cosponsored by the Cato
Institute and The Economist." As a serious rebuttal to ECB Chief Economist
Dr. Otmar Issing's astute warning of the perils of unsustainable U.S. imbalances,
it is pathetic. But as clever obfuscation, it is Mr. Greenspan at his finest.
Historians will not be kind. The Fed has clearly made the decision to dismiss
the relevance of our intractable trade deficits, and it is difficult to envisage
how this approach will be welcomed in the foreign exchange markets going forward.

"My experience is that exchange markets have become so efficient that virtually
all relevant information is embedded almost instantaneously in exchange rates
to the point that anticipating movements in major currencies is rarely possible.
I plan this morning to head in what I hope will be a more fruitful direction
by addressing the evolving international payments imbalance of the United States
and its effect on Europe and the rest of the world. I intend to focus on the eventual
resolution of that current account imbalance in the context of accompanying
balance-sheet changes.

I conclude that spreading globalization has fostered a degree of international
flexibility that has raised the probability of a benign resolution to the
U.S. current account imbalance. Such a resolution has been the general
experience of developed countries over the past two decades. Moreover,
history suggests that greater flexibility allows economies to adjust more
smoothly to changing economic circumstances and with less risk of destabilizing
outcomes.

Indeed, the example of the fifty states of the United States suggests that,
with full flexibility in the movement of labor and capital, adjustments to
cross-border imbalances can occur even without an exchange rate adjustment...

The current account deficit of the United States, essentially net exports
of goods and services, has continued to widen over the past couple of years.
The external deficit receded modestly during our mild recession of 2001 only
to rebound to a record 5 percent of gross domestic product earlier this year.
Our persistent current account deficit is a growing concern because it adds
to the stock of outstanding external debt that could become increasingly more
difficult to finance. These developments raise the question of whether the
record imbalance will benignly defuse, as it largely did after its previous
peak of about 3-1/2 percent of GDP in 1986, or whether the resolution will
be more troublesome.

My comment: It is worth noting that the late-eighties current account deficit
gave way to a small surplus with the onset of the early-nineties recession.
Clearly, today's imbalances are of a structural nature unlike any previously
experienced in the U.S.

Current account balances are determined mainly by countries' relative incomes,
by product and asset prices including exchange rates, and by comparative
advantage.To pay for the internationally traded goods and services that
underlie that balance, there is a wholly separate market in financial instruments
the magnitudes of which are determined by the same set of asset prices that
affects trade in goods and services. In the end, it is the balancing of trade
and financing that sets international product and asset prices and global
current account balances.

My comment: I would argue that current account balances are more determined
by relative Credit excess than "relative incomes" (the U.S. and Japan as a
case in point). This notion that ongoing capital surpluses are fueling our
trade deficits is ridiculous. Domestic lending and consumption excesses are
creating new dollar balances and spreading them throughout the global financial
system. These dollar balances, then, must immediately find their way to U.S.
securities and other financial assets. It is not that we are hording global "savings," as
much as we are creating new dollar claims (liabilities) that must be held by
our Creditors. It is simply not a "chicken or the egg" quandary. The new dollar
balances are first created, then disseminated globally, and then "recycled" back
to the U.S. securities markets and financial system. To judge which is the
driving force, the trade deficit or capital "surplus," we need only to look
first to domestic Credit expansion.

The buildup or reduction in financial claims among trading countries--that
is, capital flows--are hence exact mirrors of the current account balances.
And just as net trade and current accounts for the world as a whole necessarily
sum to zero, so do net capital flows. Because for any country the change
in net claims against all foreigners cumulates to its current account balance
(abstracting from valuation adjustments), that balance must also equal the
country's domestic saving less its domestic investment.

My comment: What? This is nebulous, unhelpful analysis. When an economy is
in the midst of gross Credit excess, analysis is better placed focusing on
borrowing and spending excess rather than the indeterminable subjects of true
savings and investment.

In as much as the balance of goods and services is brought into equality
with the associated capital flows through adjustments in prices, interest
rates, and exchange rates, how do we tell whether trade determines capital
flows or whether capital flows determine trade? Answering this question
is difficult because the balancing process is simultaneous rather than sequential,